What is home replacement cost coverage — and why is it important?

Written by: David Heiling
• •4 min read
Man lounging at home reading on his phone while his child naps in the backgroundImage: Man lounging at home reading on his phone while his child naps in the background
Editorial Note: Intuit Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. Information about financial products not offered on Credit Karma is collected independently. Our content is accurate to the best of our knowledge when posted.

Replacement cost coverage helps repair or replace your home with similar materials if it’s destroyed in an incident. With this type of coverage, your insurance company won’t adjust what it pays based on your home’s depreciation.

Additionally, if you have replacement cost coverage for your personal property, your insurance company may reimburse you enough to replace lost items — such as TVs, beds or couches — with a similar model.

It’s important to know whether you have this type of home coverage, as well as how much coverage you have. Factors such as increased home value due to upgrades you’ve made and rising costs of building materials may require you to purchase more coverage. Read on to learn more.

What’s the difference between replacement cost and actual cash value?

Replacement cost coverage reimburses you for the cost of replacing your home with similar materials — up to your coverage limit — while actual cash value coverage only pays out your home’s current value. Actual cash value is generally calculated by subtracting depreciation from replacement cost.

For example, if your home were destroyed in a fire, replacement cost coverage would cover the cost of rebuilding your home with materials similar to the original ones. Actual cash value coverage would pay out only how much your home is currently worth, based on its condition and the local housing market.

Why should I pay attention to my home’s replacement cost now?

If you haven’t changed your amount of coverage on your home since you bought it, you are likely underinsured, according to the Insurance Information Institute. Failure to buy replacement cost coverage — or enough of it — could result in a large bill if something goes wrong. On the other hand, overestimating your home’s replacement cost could leave you paying more than necessary for insurance coverage.

Because home replacement cost isn’t affected by your house’s value on the open market, you won’t necessarily need more coverage as your home value increases. But revisiting your coverage options might be a good idea if …

  • You’ve recently increased your home’s square footage
  • You’ve installed a new deck or made major improvements — such as new, upgraded flooring
  • The cost of home construction material and labor has increased in your area

How do I estimate my home replacement cost?

There are a few ways to estimate your home replacement cost.

  • Get an estimate from your insurance agent or a professional appraiser familiar with local regulations and building costs.
  • Use an online calculator or software to estimate the cost of rebuilding your home from the ground up.
  • Ask a real estate agent or appraiser for the average cost per square foot to build a home in your area. Multiply that cost by your home’s square footage. For example, if it costs $200 per square foot to build in your area, and your house is 1,500 square feet, the replacement cost value for your home would be approximately $300,000.

Remember, this is a general estimation, and other factors — such as home style, structure age, construction type, custom materials and special features — may skew this figure.

How do I know if I have replacement cost coverage?

You can call your insurance agent or look at your home insurance declarations page to see what type of coverage you have as well as how much.

How do I change the replacement cost on my insurance policy? 

It can be a good idea to update your replacement cost coverage every year. Estimate the value of your home and personal property replacement costs and call your insurance agent to discuss what options are available to you.

Additionally, if you’ve recently undergone a major lifestyle change, made major updates to your home or upgraded your home’s security, it might be a good time to review your current policy and make any necessary adjustments.

Next steps

If you’re interested in updating your home replacement cost coverage, take stock of your current policy and estimate your current home replacement and personal property replacement costs. If there are large gaps in coverage between what you have and need, consider calling your agent to discuss updating your coverage.

Consider comparing insurance rates and coverage options from multiple providers to see if you can save money on your premium.

About the author: David Heiling is an assigning editor at Credit Karma, specializing in auto insurance and auto loans. He strives to make financial fitness accessible and relatable to people in all stages of their financial journeys. A… Read more.